In this final blog in the Planning with Purpose series, I answer one last listener question. You can find the previous question here.
If it looks like I’ll breach the Lifetime Allowance, should I keep contributing?
Firstly, a quick reminder about the Lifetime Allowance: it’s currently £1.055 million – that’s the maximum you can have in a pension fund. If you breach that, then at various points your total pension provision is tested, and there is a tax charge known as the Lifetime Allowance Charge.
When this question comes up with my clients, we’re usually looking 10 or 20 years ahead, and what you often find is if you’re projecting growth in pension funds over a period, you see a big spike at age 75. That’s one of the points at which your pension provision is tested against the LTA.
We need to be aware of it, and if you do breach it the tax charge is usually 25% if the pension fund pays it for you, and 55% if you take the excess out as a lump sum and then pay the tax yourself. Most people in the building wealth stage are really thinking that they might breach the lifetime allowance before they come to take benefits.
For example: You know how much you have in your pension and based on some growth figure you’re assuming, the pot will breach the LTA in the future even if you stop contributing. So, should you stop?
My gut feeling is that I would continue to contribute and get the tax relief until you are nearly at the limit. Then, if you go over, it’s the growth on the fund that takes you over rather than your own money going in only to be taxed.
We had a client who was in his early 40s and we projected that at his current contribution rate and with a conservative assumed growth rate, he would breach the LTA before he retired. We counselled him not to stop contributing as the tax relief now was useful to his company.
A good rule of thumb when planning is to work within the rules in place right now. While you should always have a mind to the more distant future, the last thing you would want to do is, for example, not to benefit from income tax relief now on your pension contributions, because you’re worried about the LTA charge, only to find the LTA is abolished by a future Chancellor of the Exchequer.
So, let growth pay the LTA charge in future, and keep contributing – that’s what I would do. Remember, each case is different, so seek advice on this. It’s worth a couple of grand or more to a decent financial planner if it saves you tens or hundreds of thousands in the future.
And that's a wrap on Planning with Purpose! If you're ready, you can move on to a new topic: The Home Straight, all about preparing for retirement.
Leave a Reply